Archives for November 2014

Building a regional natural gas network is Asia’s best near-term bet for reducing carbon emissions.

Proposed and planned new gas pipelines in Asia are rapidly creating a network spanning the region. If interconnected, they would create a highly-efficient network.

In the coming transition from coal to clean energy, natural gas will play a key role.
Once this transition is complete, legacy gas pipeline networks can be shifted to carrying other fuels — like hydrogen or bio-energy. This flexibility offers enormous economic value.
The positive implications of an Asia-wide gas network for reducing climate change, enhancing energy security and increasing economic growth are huge. China would lie at the center of this network.
Events already are moving in this direction. China recently announced two deals with Russia to build natural gas pipelines to bring Siberian natural gas to China’s eastern and western regions. A third pipeline, passing through China to South Korea, also is possible.
These pipelines will increase China’s domestic gas supply. As markets change, China can trade some of that Russian gas with its neighbors. Buyers could include Japan, South Korea and/or the Association of Southeast Asian Nation states. Cross-border trading can alleviate gluts and shortages. This benefits everyone.
As Asia (and the world) reduce carbon emissions over the next 10-30 years, natural gas will become the ‘benchmark’ fuel price against which other energy sources (like nuclear, solar, biomass, hydro and wind) are compared. These discounts or premiums will offer crucial price signals for investment.
At the recent Beijing Asia Pacific Economic Cooperation meeting, China and the United States announced a bilateral agreement to cut carbon emissions. The US agreed to cuts of between 26-28% from 2005 levels by 2025. In return, China agreed its carbon emissions would peak no later than 2030, with non-fossil fuels accounting for 20% of domestic energy supply at that time.
This important China-US bilateral agreement now lays important groundwork for a bigger global climate agreement next December at the United Nations Climate Change Conference in Paris.
For a global climate agreement to succeed, energy markets must evolve. With a progressively interconnected regional gas network, Asia’s natural gas price will become the world’s benchmark price. This also will benefit everyone.
At present, the global benchmark for natural gas is the ‘Henry Hub’ price set in the United States. That’s because the US is currently the world’s largest integrated natural gas market due to America’s open, interconnected national gas pipeline network. At present, many natural gas contracts in Asia are pegged to the Henry Hub price — even though the Henry Hub price doesn’t necessarily reflect supply-demand fundamentals in Asia.
But with an integrated, cross-border natural gas pipeline network, ‘Asia’ (ie China, Japan, South Korea, the ASEAN states, East Timor and Australia) would have its own benchmark trading price — most likely set in Hong Kong or Shanghai.
Both Hong Kong and Shanghai are domestic gas pipeline hubs and both have Liquid Natural Gas import terminals either operating or planned. This makes them ideal for arbitraging price differentials between pipeline gas and Liquid Natural Gas. This will improve price signals, particularly if prices are denominated in Chinese yuan currency as it expands its role as a trade currency.1
In Australia, ill-considered construction of Liquid Natural Gas export infrastructure (some of it to China) has led to cost overruns, negative environmental consequences and bad long-term economics. Arguably, these investment mistakes have been caused by misleading price signals (for natural gas, carbon emissions and tanker transport, for instance), the complexity and inflexibility of LNG infrastructure and the rapidly falling cost of supply alternatives.2
Most energy economists now estimate carbon prices of $20-30 per tonne are needed over the next 5-15 years to shift global infrastructure and energy resource development investment toward low-emission energy sources like solar, wind and nuclear and away from coal.
In 2011, the energy-related carbon emissions of China, Japan, South Korea, the ASEAN states and Australia amounted to 12.7 billion metric tonnes. Priced at $25 dollars per tonne, that’s $317 billion per year that can be recycled into new infrastructure investment. This money could flow through such organizations as the Green Climate Fund, the Asian Development Bank or China’s proposed Asian Infrastructure Investment Bank.
A large amount of this infrastructure investment would likely flow to to China’s state champion infrastructure companies, like State Grid Corp. of China. That’s because companies like State Grid have now developed world-class expertise in large infrastructure projects in China’s over the past two decades. That’s because a cross-border gas pipeline system in the region can create the pathway for other energy infrastructure — like High-Voltage Direct Current (HVDC) power lines — to be added later.3
A regional natural gas pipeline infrastructure also can offer a very intriguing solution to offshore territorial tensions in the South China Sea and East China Sea. These could be shelved for decades if China and her neighbours agreed to a series of offshore Joint Development Areas in the South China Sea and East China Sea, connected by a regional energy infrastructure.
This would encourage exploration and production of the South China Sea and East China Sea resource riches, while postponing final determination on sovereignty until the economic stakes are lower.
It would also provide an ideal opportunity for China and the US to cooperate militarily4 in providing maritime security for both the JDAs and the infrastructure serving them. That, in turn, could lead to deeper US-China military cooperation in other areas, such as fisheries, disaster relief and protection of commercial shipping.
The benefits above add a positive geopolitical benefit to the undeniable economic and climate change advantages of the proposals.
In hosting meetings of the Asia Pacific Economic Community (APEC) this year, China has stressed cross-border connectivity5 to deepen regional economic integration and create an Asian Maritime Silk Road6 to fulfill a longer-term goal of an ‘Asia-Pacific Dream’7 of rising regional living standards.
Deepening energy market connectivity through investment in a long-term, economically-catalytic, cross-border gas pipeline network provides a powerful spur to fulfilling all these goals at once.